4.2 d price 4.4 in IB BM syllabus

Price If markets set price and costs determine profit, then what is the price we put on the product? As a business person, we set a price that reflects: Costs Market value Competition Market position

Steps in the marketing-pricing process Develop marketing strategy Make marketing mix decisions Estimate the demand curve and elasticity Account for costs Mark up/ Gross profit and gross profit margin Understand competition and legal factors Determine pricing strategies Set price

Determinants of quantity demand (movement along the demand curve) Price causes the QD of a product to change Determinants of demand (cause the demand curve to shift) Tastes  Induced demand number and price of substitute goods number and price of complementary goods Income and distribution of income The Demand Curve

fig 2.2 D0D0 Price P OQ0Q0 Quantity An increase in demand

fig 2.2 Price P OQ0Q0 Quantity D0D0 An increase in demand

fig 2.2 D1D1 Price P OQ0Q0 Q1Q1 Quantity D0D0 An increase in demand

Price Elasticity of Demand If price changes, how much will quantity demanded (supplied) change? If price elasticity of demand for a product is inelastic, the demand curve is more vertical.

Price elasticity and Inelasticity Elastic: revenue goes down after we raise price When price goes up, customers don’t buy it Inelastic: revenue goes up after we raise price When price goes up, customers buy it anyway The number of customers might drop, but the overall revenue increases

Determinants of price elasticity Necessity Very, inelastic Not very, elastic Time constraints Need it now, inelastic Can wait, elastic Proportion of income No big deal, inelastic Big portion of income, elastic Substitutes available No, inelastic Yes, elastic Branding and advertising Reduce demand from competition Makes the product more inelastic

Elasticity and Total Revenue TR is income business receives by selling its product TR = P x Q Price increase, revenue drop = Price elastic Price increase, revenue increase = Price inelastic

Pricing Revenue should exceed the total of Cost of goods sold Variable Costs Fixed Costs If the total revenue exceeds total costs, then we have a profit

Profit Total Revenue – Total Cost Total Revenue = P x Q Total Costs = Fixed Costs + Variable Costs + COGS

three types of cost when a business produces goods and provides services to consumers, it has these three costs: 1) Cost of goods sold 2)Fixed costs 3) Variable costs

Cost of Goods Sold What the company, business, retailer pays to the producer or wholesaler for the goods he/she resells to the customer

Fixed Costs totally independent of the level of output would be incurred even when output was zero. Examples rent, mortgage payments, managers’ salaries, and loan repayments. Fixed costs often called overheads

Variable Costs vary directly with output as the level of output increases, then variable costs increase Examples raw materials, production wages, other direct production costs, and utility bills.

Pricing strategies Cost Plus Competition based Price leadership Market based Penetration Skimming

Cost Plus Pricing Strategy Set the price at your production cost, including both cost of goods and fixed costs at your current volume, plus a pre- determined profit margin. For example, your widgets cost $20 in raw materials and production costs, and at current sales volume (or anticipated initial sales volume), your fixed costs come to $30 per unit. Your total cost is $50 per unit. You decide that you want to operate at a 20% markup on cost, so you add $10 (20% x $50) to the cost and come up with a price of $60 per unit.  So long as you have your costs calculated correctly and have accurately predicted your sales volume, you will always be operating at a profit. Markup % (and pricing) can be calculated two ways  On cost  On retail

Competition Based Pricing Strategy Price leadership Other businesses match your price Works if you are the dominant business  If you have the largest market share

Market Based Pricing Strategy Penetration pricing Used to gain footing in new market Low price in order to quickly gain market share Market skimming pricing Also called price skimming Initial high price  Recover costs and to take advantage of customers who will pay almost any price to have the item ‘first’

HL Market-based Pricing strategies Price discrimination Used extensively by airlines and cell phone companies Loss leaders One or two items at below cost Must have them in stock initially at that price or this is illegal Psychological $19.99 instead of $20.00 Promotional Buy one, get one half price Basically a 25% discount